RPT-Fitch affirms Australia at 'AAA'; stable outlook

Thu Mar 28, 2013 5:28am EDT

(Repeat for Additional Subscribers)

March 28 (Reuters) - (The following statement was released by the rating agency)

Fitch Ratings has affirmed Australia's Long-Term
Foreign- and Local-Currency Issuer Default Ratings (IDRs) at 'AAA'. The Outlooks
on the ratings are Stable. The agency has also affirmed the Country Ceiling at
'AAA' and the Short-Term Foreign-Currency IDR at 'F1+'.

KEY RATING DRIVERS

The affirmation of Australia's sovereign ratings reflects the following factors:

- Australia is a high-income developed economy, has strong political, civil and
social institutions and has a credible and transparent macroeconomic policy
framework. Australia has built up the capacity to absorb shocks due to a
combination of low public debt, a free floating exchange rate and liberal trade
and labour markets, which allows the authorities to run strong countercyclical
policies during downturns and the economy to adjust.

- Australia has remained one of the strongest performing economies in the 'AAA'
universe since the global financial crisis began with real GDP rising 3.6% in
2012, up from 2.1% in 2011. In comparison, the 'AAA' peer rating group grew at
0.7% in 2012. The combination of strong demand for natural resources along with
robust mining investment should continue to provide valuable support to the
economy. Fitch forecasts real GDP to grow 2.5% and 2.8% in 2013 and 2014
respectively.

- The current boom in the mining sector, however, has not been without its
challenges as the continued strength of the Australian dollar has led to strains
in the non-mining sector. However, Australia's unemployment rate remains low,
standing at 5.4% in February. Ultimately, the key longer-term challenge facing
Australia is how the economy will respond when mining sector investment peaks
and begins to turn down It is still too early to judge how the economy will
perform once this stage is reached, however.

- The original goal to bring the Commonwealth/central government budget back to
surplus in FY2012-13 (financial year ending 30 June 2013) will not be met due to
recent volatility in commodity prices and a strong Australian dollar.
Nonetheless, Fitch holds the view that the fiscal consolidation process has
slowed down, not reversed course. Fitch estimates that the Commonwealth budget
deficit could finish at about 1.5% of GDP in FY2012-13, compared to a shortfall
of 3.0% of GDP in FY2011-12. Including the budgets of the states, Fitch
estimates Australia's general government deficit will be about 2.5% of GDP in
FY2012-13 (versus 4.4% in FY2011-12).

- Australia's external finances are a rating weakness compared with 'AAA'
sovereign-rated peers. The current account deficit widened to 3.7% of GDP in
2012, compared to 2.2% of GDP in 2011. Furthermore, the current account could
widen further as the terms of trade continue to moderate and the repatriation of
profits by foreign investors increases. As a result, Australia's net external
debt position, which stood at 51.3% of GDP in 2012, will remain well above the
'AAA' peer rating group median of 25.1% of GDP for a prolonged period.

- Fitch regards Australia's banks as among the strongest in the world on a
stand-alone basis, despite their heavy reliance on wholesale funding markets.
However, banks have made strides in reducing their reliance on short-term
foreign funding, increasing their customer deposit base, and strengthening their
liquidity positions. In addition, asset quality is healthy with the
non-performing loan ratio below 2.0% at end-2012.

RATING SENSITIVITIES

The Stable Outlook reflects Fitch's assessment that downside risks to the 'AAA'
rating are currently not material. Nonetheless, the following risk factors
individually, or collectively, could trigger negative rating action:

- Large-scale problems in the banking sector, whether driven by a significant
deterioration in asset quality (e.g. a sharp downturn in the housing market) or
by a loss of access to international wholesale funding.

- A rapid and sustained decline in prices of Australia's key natural resources
exports could have large knock-on effects for the economy and public finances.
- Australia is facing a long-term adjustment challenge as the eventual end of
the mining boom will place greater pressure on the non-mining sector's ability
to raise its competitiveness and in turn support potential growth. Otherwise,
Australia's unemployment rate could rise sharply and place sustained pressure on
the public finances and the overall sovereign credit profile.

KEY ASSUMPTIONS

- Fitch's forecasts for the general government balance and debt levels are based
on the assumption that the Australian authorities remain committed to sound
fiscal management as highlighted in the Charter of Budget Honesty Act.

- The global economic environment remains conducive for global trade and
investment flows. In particular Fitch assumes commodity prices do not suffer a
sharp correction and that China, which has become a key destination for
Australian exports, does not experience a sudden "hard landing".

- Australia's high level of political stability and governance is maintained,
which supports the country's attractive business climate.